Intelius, CEO Jain face suit over Addresses.com

Qwil asking to rescind merger

Published 10:00 pm, Tuesday, April 8, 2008

Intelius, the online directory service led by Internet entrepreneur Naveen Jain, has become embroiled in a legal fight with the founders of a company it bought more than two years ago.

Both Intelius and the creators of Qwil are claiming that the others did not properly disclose pertinent information that would have affected the price of the deal. At the time of the acquisition in August 2005, Intelius offered $2 million in cash and 500,000 shares.

But now, everyone is arguing that he got a raw deal.

Bellevue-based Intelius claims that Qwil executives misrepresented the quality and quantity of contacts in the Addresses.com database, a profitable online e-mail directory that Thomas "Buck" Lindsey founded in 2000. The suit, filed in U.S. District Court late last month, also claims that Intelius was not made aware of a tax liability of $41,701 at Qwil.

Meanwhile, former Qwil executives allege that Intelius failed to disclose a tax burden of more than $3 million, a significant omission, because they believe the taxes would have negatively affected Intelius' net income for 2005 by as much as 35 percent. Net income was used to set a valuation on Qwil at the time of the acquisition.

Qwil executives are asking a King County Superior Court judge to rescind the merger and force Intelius to return the Addresses.com assets at their current value.

"They believe Addresses.com to be very valuable," said Anthony Todaro, an attorney with Peterson Young Putra who is representing the Qwil founders. "And the simple fact is, they would not have done the deal -- or certainly would not have done it on the same terms -- had they known then the true financial condition of Intelius and the true net income that the company was enjoying at the time."

Canceling the deal and returning the assets is the preferred remedy under the Washington State Securities Act, Todaro said.

"Because this deal was done on misrepresented facts, you undo the deal," Todaro said. "If there was a misstatement and it was material, then you are afforded relief. Period."

Advertising revenue for the Addresses.com business unit accounted for about $3 million in revenue in 2006, up from $300,000 during the prior year.

Intelius representatives declined to comment, and their legal counsel -- board member Arthur Harrigan -- was not available.

The legal battle comes at an inopportune time for Intelius, which is waiting to go public on the Nasdaq stock market. The lawsuits -- filed over the past two weeks -- have not been disclosed in Securities and Exchange Commission filings.

Legal troubles have followed Jain since his time at the helm of InfoSpace, a publicly traded Internet search company that he founded in the mid-1990s. During his tenure at InfoSpace, Jain was accused of violating federal securities laws for participating in so-called "short-swing" trades. As a result of that litigation, Jain sued the lead underwriter of InfoSpace's initial public offering, InfoSpace's counsel and others in connection with the trades. The case is still under appeal.

After he was fired from InfoSpace, Jain was sued by his former employer, accused of stealing trade secrets and violating a noncompete agreement in setting up Intelius. A judge offered a mixed ruling in the case in January 2004.

Since both parties have filed separate suits in different courts, the next procedural step will be determining whether the case will be heard in federal or state court. Attorneys for Qwil have asked the federal court to dismiss the case or stay the proceedings until a resolution has been reached in King County Superior Court.

Attorneys for the Qwil founders also argue that Intelius pre-emptively filed its case in federal court in what they describe as a "race to the courthouse." Because of that, they are asking that the case be heard in King County Superior Court.

"They have conjured up this case to file to make it look like they are on the offensive against Qwil," Todaro said.